The U.S. Federal Reserve Board is poised to provide more economic stimulus should the recovery begin to falter.
Minutes of the Fed’s latest policy discussions, released Wednesday, depict a group of central bankers that is largely unimpressed by a spate of positive economic indicators, anticipating weaker readings in the months ahead as slower growth abroad curbs demand for U.S. exports.
The tone of the official synopsis of last month’s meeting of the Federal Open Market Committee reinforces the widely held impression that a third, multibillion-dollar purchase of financial assets remains on the table.
However, the decision to launch another quantitative easing program would depend on whether the Fed’s pessimistic outlook actually comes to pass, suggesting the current streak of positive data would have to turn negative before there would be enough support to trigger so-called QE3.
While a contingent of the Fed’s policy committee appears ready to resume asset purchases immediately, the minutes indicate this group is being held in check by a larger faction that would prefer to wait before making a decision that would court further controversy with the Fed’s critics on Capital Hill and on Wall Street.
“A few members observed that, in their judgment, current and prospective economic conditions … could warrant the initiation of additional securities purchases before too long,” the minutes said. “Other members indicated that such a policy action could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 per cent over the medium term.”
The minutes describe the committee’s Jan. 24-25 meeting, a historic session that saw the Fed state definitively for the first time that it would aim to keep inflation at 2 per cent. In another first, the Fed revealed the interest-rate projections of all 17 officials that participate in policy discussions. Those projections led the Fed to declare that it likely would keep its benchmark interest rate near zero until the end of 2014.
Those decisions weren’t unanimous, however. The minutes reveal that Daniel Tarullo, a member of the Washington-based Federal Reserve Board, abstained from voting on releasing the Fed’s inflation target because “he questioned the ultimate usefulness of the statement in promoting better communication of the committee’s policy strategy.”
And as disclosed at the time of the meeting, Jeffrey Lacker, president of the Richmond Fed, opposed committing to keep interest rates low until 2014 because he anticipated borrowing costs would need to rise much sooner to keep a lid on inflation.
The committee agreed last month to acknowledge that the U.S. economy “has been expanding moderately.”
That relatively unenthusiastic assessment is causing a some confusion in financial markets as a growing pile of indicators suggest the economy is gaining momentum. In particular, a government report published after the Fed meeting showed the unemployment rate fell to 8.3 per cent in January, a much quicker decline that most forecasters had been expecting.
The positive trend continued Wednesday. A new Fed report showed that manufacturing output gained 0.7 per cent in January, following an upwardly revised 1.5-per-cent increase in December. And in one of the first glimpses at the state of the economy in February, the New York Fed’s index of factory activity in New York state rose to 19.5, the highest since June 2010.
“Manufacturing activity is off to a solid start in 2012,” Barclays Capital economist Cooper Howes said in a note to clients.
But most Fed officials are unwilling to declare victory. Even at 8.3 per cent, the unemployment rate is well in excess of what policy makers consider appropriate to satisfy their mandate to achieve maximum employment. On three occasions since the January policy meeting, Fed chairman Ben Bernanke has expressed little enthusiasm about the state of the economy.
So even though a third stimulus program is uncertain, economists say there is little reason to expect the Fed to raise borrowing costs much before that 2014 target it has set. The minutes reveal that “most participants” in the January meeting foresaw little likelihood the Fed would begin selling the assets it has already purchased before 2015.